CHAPTER

17 COMPLETING THE AUDIT

17-1. a. (3) b. (1) c. (4) d. (3)

17-2. a. (4) b. (3) c. (1) d. (4)

17-3. a. (3) b. (1) c. (1) d. (2) e. (1)

17-4. Tracy Brewing Company

a. 4 - The amount appeared collectible at the end of the field work.

b. 1 - The uncollectible amount was determined before end of field work.
c. 3 - Amount should have been determined to be uncollectible before end of
field work, but it was discovered after the issuance of the statements. The
financial statements should have been known to be in error on 8-20-06.
d. 2 - The cause of the bankruptcy took place after the balance sheet date,
therefore the balance sheet was fairly stated. Account may be written off as
uncollectible at 6-30-06, but they are not required to do so. Footnote
disclosure is necessary because the subsequent event is material.
e. 2 - The sale took place after the balance sheet date but, since the loss was
material and will affect future profits, footnote disclosure is necessary.
f. 2 - The lawsuit originated in the current year, but the amount of the loss is
unknown.
g. 1 - The settlement should be reflected in the 6-30-06 financial statements as
an adjustment of current period income and not a prior period adjustment.
h. 4 - The financial statements were believed to be fairly stated for 6-30-06 or 8-
19-06.
i. 2 - The cause of the lawsuit occurred before the balance sheet date and the
lawsuit should be included in the 6-30-06 footnotes.
17-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

17-5. Flowmeter, Inc.

Item Required Disclosure

No. Audit Procedures and Reasons
1. Goods in-transit would be The receipt of the goods provides
detected in the course of the additional evidence with respect to
auditors review of the year-end conditions that existed at the date
cutoff of purchases. The auditor of the balance sheet and hence the
would examine receiving reports financial statements should be
and purchase invoices to make adjusted to take into account such
certain that the liability to suppliers additional information.
had been recorded for all goods
included in inventory, and that all
goods for which the client was
liable at year-end were recorded in
inventory.
2. Settlements of litigation would be The settlement of litigation would
revealed by requesting from the require an adjustment of the
companys legal counsel a financial statements since the
description and evaluation of any events that gave rise to the
litigation, impending litigation, litigation had taken place prior to
claims, and contingent liabilities of the balance sheet date.
which he has knowledge that
existed at the date of the balance
sheet being reported upon, together
with a description and evaluation
up to the date the information is
furnished. A review of cash
disbursements for the period
between the balance sheet date and
completion of field work may also
reveal evidence of the settlement.
3. The purchase would normally be The purchase of a new business is
revealed in general conversations not an event that provides evidence
with the client and would further with respect to conditions existing
be detected by reading the minutes at the balance sheet date; hence, it
of meetings of stockholders, does not require adjustment in the
directors, and appropriate financial statements. However,
committees. In addition, because such an event would normally be
the amount paid is likely to be of such importance that disclosure
unusually large in relation to other of it is required to keep the
cash disbursements, a review of financial statements from being
cash disbursements for the period misleading. If the acquisition is
between the balance sheet date and significant enough, it might be
completion of field work is likely advisable to supplement the
to reveal such an extraordinary historical statements with pro
 Completing the Audit 17-3
transaction. Moreover, because a forma statements indicating the
purchase of a business usually financial results if the two firms
requires a formal purchase had been consolidated for the year
agreement, the letter from the ending December 31, 2005.
firms legal counsel would Otherwise, disclosure in footnotes
probably have revealed the to the statements would be
purchase. adequate. Occasionally, a situation
of this type may have such a
material impact on the entity that
the auditor may wish to include in
his report an explanatory paragraph
directing the readers attention to
the event and its effect.
4. Inventory losses attributable to a Losses attributable to floods
flood would be brought to the subsequent to the balance sheet
auditors attention through date do not provide information
inquiries and discussions with with respect to conditions that
corporate officers and executives. existed at the balance sheet date;
Moreover, the auditor would know hence, it does not require an
the location of the plants and adjustment in the financial
warehouses of his client and upon statements. However, such an
becoming aware of any major incident may be of sufficient
floods in such a location, he would importance to require footnote
investigate to determine if his disclosure. Occasionally, a
clients facilities had suffered any situation of this type may have
damage. such a material impact on the entity
that the auditor may wish to
include in his report an explanatory
paragraph directing the readers
attention to the event and its effect.
5. The sale of bonds or other Sales of bonds or capital stock are
securities would require a filing transactions of the type that do not
with the SEC in which the auditor provide information with respect to
would presumably be involved. In conditions that existed at the
addition, the sale would be balance sheet date; hence,
revealed by reading the minutes of adjustment of the financial
directors and finance committees statement is not required.
meetings, by corresponding with However, such sales may be of
the clients attorneys and by sufficient importance to require
examining the cash receipts book footnote disclosure. Occasionally,
in the period subsequent to the a situation of this type may have
balance sheet date for evidence of such a material impact on the entity
unusually large receipts. that the auditor may wish to
include in his report an explanatory
paragraph directing the readers
attention to the event and its effect.
17-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition

17-6. Olars Manufacturing Corporation

1. The governments approval of a plan for the construction of an express

highway would have come to the CPAs attention through his inquiries of
officers and key personnel, his examination of the minutes of the meetings of
the board of directors and stockholders, and his reading of local newspapers.
The details of the item would not have to be disclosed as a separate footnote
because all fixed assets of the corporation, including the right to the
condemnation award, were to be sold as of March 1, 2006 (see item 6).

2. It is improbable that the CPA would learn the source of the P25,000 unless it
were revealed in a discussion with the president or his personal accountant, or
unless the auditor prepared the presidents personal income tax return, in
which case the interest charges would have lead to his investigation of the use
to which the funds were put. Setting out the loan in the balance sheet as a
loan from an officer would be sufficient disclosure. The source from which
the officer obtained the funds would not be disclosed because it is the
officers personal business and has no effect upon the corporations financial
statements. Indeed, disclosure of the funds source might be construed as
detrimental to the officer.

3. The additional liability for the ore shipment would have been revealed to the
CPA in his scanning of January transactions. His regular examination of
2001 transactions and related documents such as purchase contracts would
have caused him to note the time for subsequent follow up to determine the
final liability. In addition the clients letter of representation might have
mentioned the potential liability. The item would not require separate
disclosure by footnote or otherwise and would be handled by adjusting the
financial statement amounts for purchases, ending raw materials inventory,
and accounts payable by the amount of the additional charge, P9,064 {[(72 -
50) / 50] = 0.44; 0.44 x P20,600 = P9,064}.

4. The CPA might learn of the agreement to purchase the treasurers stock
ownership through his inquiries of management and legal counsel,
examination of the minutes of the meetings of the board of directors and
stockholders and subsequent reading of the agreement. The absence of the
treasurer might also arouse the CPAs curiosity. The details of the agreement
would be disclosed in a footnote because the use of company cash for the
repurchase of stock and the change in the amount of stock held by
stockholders might have a heavy impact on subsequent years financial
statements. Usually, a management change, such as the treasurers
resignation, does not require disclosure in the financial statements. The
details underlying the separation (personal disagreements and divorce) should
not be disclosed because they are personal matters.
 Completing the Audit 17-5
5. Through inquiries of management, review of financial statements for January,
scanning of transactions, and observations, the CPA would learn of the
reduced sales and of the strike. Disclosure would not be made in the financial
statements of these conditions because such disclosure might create doubt as
to the reasons therefore and misleading inferences might be drawn.

6. The contract with Lopez Industries would come to the CPAs attention
through his inquiries of management and legal counsel, his reading of the
minutes of the meetings of the board of directors and stockholders, and his
examination of the contract. All important details of the contract should be
disclosed in a footnote because of the great effect upon the corporations
future. The factors contributing to the entry into the contract need not be
disclosed in statements; while they might be of interest to readers, they are by
no means essential to make the statements not misleading.